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The problems of warehousing in Detroit are the result of financial deals that weren't envisaged when the system was set up, the chief executive of the London Metal Exchange said Thursday.

In a rigorous defense of the LME's warehouse system, Martin Abbott told a Metal Bulletin conference in Paris that the cheap, easy availability of money is making deals to lock up metal in warehouses extremely attractive to banks, traders and producers, a situation that looks unlikely to change.

"The seemingly endless availability of cheap finance is to blame--this is not a consumer problem," he said. "There are warehouse queues in Detroit because the metal stored there is freely available, not locked up, unlike in some locations where you can't get to metal because it's tied up in financing deals."

When demand for aluminum in its key consuming sectors of automotives and aerospace slumped during the downturn, producers struck a number of deals with investors, traders and banks by selling or pledging metal to raise much-needed working capital. For their part, investors, traders and banks bought inventory at spot prices and sold futures one to two years forward in so-called financing deals.

"These transactions were never envisaged when the warehouse system was set up," he said.

One warehousing firm owned by a unit of Goldman Sachs (GS) has come under fire recently because of delays in accessing metal it stores in Detroit.

To deal with this, from April 2012 Goldman's Metro International Trade Services--which is facing complaints over long delays accessing metal in Detroit by major aluminum users like U.S. can maker Coca-Cola Co. (KO) and U.S. aluminum sheet maker Novelis Inc.--will now have to deliver out 3,000 metric tons a day, double the previous rate.

Because more metal will be available in the market more quickly, the changes to the rules are likely to lower the cost of buying physical aluminum supplies, and will help ease the supply bottleneck that has been created.

The new delivery rate applies to all warehousing companies storing more than 900,000 tons of metal in one location, but Goldman's Metro is the only one currently doing so. It is storing nearly all of the over 1 million tons of aluminum held in the LME system in Detroit, the heart of the U.S. auto industry. This is equivalent to a quarter of the LME's global aluminum stock.

The situation has developed since the economic downturn, when metal was flowing into warehouses as demand slumped. It has come under closer scrutiny since a number of influential metals industry participants, like Goldman Sachs, Glencore International PLC (GLEN.LN), Swiss merchant Trafigura Beheer BV and J.P. Morgan Chase & Co. (JPM), have bought warehouse firms, leading to worries that they were using knowledge of how much metal was stored to determine their own trading strategies.

Abbott said the exchange hadn't received a formal complaint from a consumer, which by definition couldn't just be a gripe about the situation but had to show a legitimate problem being experienced.

He said the LME didn't get a formal letter of complaint from Novelis and when it finally received correspondence it was by fax. Novelis, the world's biggest aluminum consumer, has argued that it believes its letter constituted a formal complaint.

"Metro may have the longest queues but it also could be argued to have the shortest queue, because it is one of the only locations you can get metal from," Abbott said.

Abbott said the exchange had set up the existing metal-delivery structure, including a minimum rate of 1,500 tons a day delivered out of the largest warehouses, on the basis that none of its buyers could consume much more than that level.

He said the LME had no supervisory scope to rule on the payment of incentives paid by warehousing firms to attract metal into their facilities, and that they were "valid transactions."

-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; andrea.hotter@dowjones.com

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